In a research note Monday, Evercore auto analyst Arndt
Ellinghorst called the violation a "move more worthy of a
back-street garage looking to get a used car through a mandated
vehicle inspection."

He also said the software ruse showed that even with "the largest
R&D budget globally in any sector," VW couldn't figure out
how to make a large number of its diesel engines compliant with
US standards for emissions.

Volkswagen's four-cylinder TDI diesel engines (TDI stands for
"turbocharged direct injection") are supposed to set a new
standard for the technology. They have a devoted following among
US buyers who value their combination of performance and fuel
economy, and, until last week, their revamping of diesel's poor
image.

That contrasts with what the EPA says the engine does — emit
nitrogen oxides, or NOx, at up to 40 times the government
standard.

In recent years, a debate has developed in Europe about whether
modern diesels are emitting more in real-world operations than
they are when being tested and certified. Diesel passenger cars
are far more rare in the US vehicle fleet, but if you're driving
a small diesel vehicle in the US, rather than a big truck,
chances are it was built by VW.

Screenshot via VW

This isn't what VW needs right now in the US. Using computer
software to fool smog testers into thinking the carmaker's
diesels were a lot cleaner than they were could cost the company
hundreds of millions of dollars in fines, if not billions.
Theoretically, the government could fine VW $18 billion, but no
one expects the violation to be that costly.

As Evercore's Ellinghorst pointed out in his note, however, VW
initially denied any wrongdoing last year when the US government
refused to certify 2016 vehicles equipped with the small TDI
engine. It was then "that the company came clean with respect to
what was going on," Ellinghorst wrote.

Volkswagen has been struggling for years to reassert itself in
the US auto market, the world's most competitive. US auto sales
are on a pace to beat 17 million new cars and trucks sold in
2015. The market is surging, but VW has been left on the
sidelines.

Or, more accurately, feeding at the bottom, with just slightly
more than 2% market share. (Audi has performed much better in the
luxury segment, but the brand isn't expected to help VW compete
with mass-market leaders, such as General Motors, Ford, and
Toyota).

The VW and Audi vehicles implicated in the TDI deception have
helped Volkswagen pick up modest market share since 2009, when
the carmaker held less than 2% share in the US market. According
to Evercore, of the VW vehicles that the carmaker is selling,
roughly one in five has a diesel under the hood (but not all use
the four-cylinder TDI).

A significant percentage of VW and Audi sales are of
diesel vehicles.Evercore

Recent recalls from GM (for faulty ignition switches) and Honda
(for airbags manufactured by Takata that can explode and send
metal shards into the passenger compartment) have been far more
serious and have invited the ire of government regulators for
undermining decades of striving to make vehicles safer.

If VW did install software that intentionally generated lower
emissions readings during testing, then the company will not
necessarily have threatened lives (unless you consider pollution
to be broadly life-threatening), but it will have threatened
America's deep investment in a better environment over the past
50 years.

Americans have been making buying decisions based on
environmental considerations since the 1970s, when smaller, more
fuel-efficient cars arrived from Japan to challenge big,
low-mile-per-gallon cars from Detroit. Much of the reason
Americans have not leaped on the diesel bandwagon is the image of
these engines serving up better mileage and performance — while
expelling plumes of black, acrid smoke.

So even though VW hasn't been able to make much progress in its
efforts to retake a chunk of the US auto market, it has built up
trust among owners that its TDIs are new-age diesels. If that
trust is revealed to be bogus, then the damage to a core group of
VW brand supporters could be profound.